Want to Sell Your Business to an EOT? What You Should Know
Employee Ownership Trusts (EOT) sounds so complicated, especially if it includes “Trust” in the title, but when you get to know how it works and the benefits it gives to business owners and employees, it becomes very simple.
What exactly is an EOT?
Well, an EOT is a model encouraged by the Government to enable employees to become stakeholders in the business they work for. The best examples would be that of John Lewis and Richer Sounds who have both successfully implemented this model into their businesses. This has now become a serious option when business owners are looking to retire and sell their business, without having to go to the market and sell their business via a selling agent, getting involved in the complexities of dealing with solicitors, banks and accountants (however, we at Raffingers are always the nice guys!).
There are benefits to both the business owner and the employees in terms of tax breaks, where the business owner can benefit from a zero tax rate on the sale proceeds and the employees can earn tax-free annual bonuses up to £3,600.
As you would expect, there are various conditions that need to be satisfied being:
- The business owner MUST sell at least 51% of his shares to the EOT, and the company has to be a trading company (not an investment company)
- ALL employees are part of the EOT. You cannot pick and choose who should or should not be included
- The company must have sufficient employees who are not existing shareholders for viable small companies
- The valuation of the business must be at a fair value
When I speak to clients about implementing an EOT, they particularly like the idea that they can continue to be directors of the business after they have sold their shares, which protects them if the sale proceeds are being paid over a number of years from future profits. They also like the idea that some banks will actually lend to the business so a lump sum can be paid to the outgoing business owner. Another added advantage is that existing employees are retained within the business, protecting family members' jobs if they are working in the business and won't be made redundant, which is always the fear when new owners take over the business, allowing for the existing culture of the company to be retained.
If only it was as easy as it sounds for a business owner to earn out payments based on future profits - for this to happen, very strong systems and processes and a strong leadership team should be in place. I have implemented the Traction (Gino Wickman) model into a number of companies that give it the foundations and structure to ensure the business continues to thrive and grow, which enables the outgoing owners to have some degree of certainty that they will get paid over the agreed number of years.
The governance of the company changes and a Board will represent the Trustees of the EOT, so it is important that everyone understands their new roles and responsibilities, especially as the Trust Board holds the directors to account.
One other issue to consider is that if the business owner has sold his shares to the EOT, then he is unable to draw dividends and would have to go back on the payroll if he continues to be involved in the business which might not be tax efficient.
To conclude, EOTs are a very good option when considering exiting from your business and should be seriously considered if maintaining the company culture is important and you have a strong leadership team.
If you have any further questions, then please don't hesitate to email me at lee.manning@raffingers.co.uk or click here.